BEFORE THE ADJUDICATING OFFICER 

SECURITIES AND EXCHANGE BOARD OF INDIA  

[ADJUDICATION ORDER NO. AP/AO- 04/2006-07] 

In the matter of Investigations in  

AFTEK INFOSYS LTD

AND  

In respect of

1)      Pursuant to the investigation in the scrip of Aftek Infosys Ltd. (hereinafter referred to as “AIL”), Securities and Exchange Board of India (hereinafter, SEBI) appointed Mr. K.R.C.V. Seshachalam, as the Adjudicating Officer under Section 15 I of SEBI Act, 1992 read with Rule 3 of SEBI (Procedure For Holding Inquiry And Imposing Penalties By Adjudicating Officer) Rules, 1995 (hereinafter referred as 'Adjudication Rules') to inquire into and adjudge the alleged practices of the following entities (hereinafter referred to as noticees):

a)      Phulchand Sons Pvt. Ltd.

b)     Deepal Dalal (Director of Phulchand Sons Pvt. Ltd.)

c)      Paresh Shah (Director of Phulchand Sons Pvt. Ltd.)

d)     Add investments

e)      Deepak Dalal (Partner in Add investments)

f)       Anita Dalal (Partner in Add investments)

g)     Maruti Securities Ltd.

h)     K. Varadarajan (Director of Maruti Securities Ltd.)

i)       K. Chitra (Director of Maruti Securities Ltd.)

j)        V.N. Anuradha (Director of Maruti Securities Ltd.)

k)     A. Rakesh (Director of Maruti Securities Ltd.)

l)       Y. Krishna (Director of Maruti Securities Ltd.)

that are prohibited under Regulation 4 (1), (2)(a), (b), (e) and (n) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (hereinafter PFUTP Regulations, 2003), for which penalty is imposable under Section 15HA of SEBI Act, 1992. The aforesaid appointment dated August 03, 2004 was conveyed vide order dated August 11, 2004 and vide order dated December 28, 2004, the matter was transferred to Mr. A. Chandrasekhar Rao. Subsequently vide order dated December 20, 2005, the matter was transferred to the undersigned.

2)      Show cause notices (SCN) dated October 05, 2005 under Rule 4(1) of the said Rules were issued by then AO, Mr. A. Chandrasekhar Rao to all the respective entities, communicating the details of the charges leveled against them, as under:

a)      SEBI conducted investigation into the scrip of AIL for the period September 01, 2003 to October 08, 2003 which was divided into the following three periods.

i)       First period (pre period) - September 01, 2003 to September 23, 2003

ii)     Second period (interim period) - September 24 & 25, 2003

iii)  Third period (post period) - September 26, 2003 to October 08, 2003

Table – 1

b)     The entities named in the SCN traded in the scrip of AIL through BSE members Chandravadan J. Dalal (CJD) and Pravin V. Shah (PVS), as follows.

Table – 2

c)      It is alleged that noticees generated artificial volumes in the scrip of AIL by acting in concert and further by reversing the trades the next day, also through matched trades through the same set of brokers, resulting in the generation of artificial volumes. The volumes of the entities constituted very high volumes to the total traded quantity. The specifics in this regard are covered in the findings. The aforesaid allegation was leveled in the background of the inter relationships amongst the noticees.

3)      In response to the SCN, noticees filed their replies as under :

Table -3

4)      The contents of the replies are as under :

a)      Phulchand Sons (Investments) Pvt. Ltd in its reply made contentions which are identical to that of Add Investments; the contentions of Add Investments are discussed in the ensuing paragraphs.

b)     Deepak Dalal, the noitcee as Director of Phulchand Sons (Investments) Pvt. Ltd., relied upon the reply dated November 10, 2005 of Phulchand Sons (Investments) Pvt. Ltd, as his reply to the SCN. Besides, Deepak Dalal also submitted that he is no longer a director of Phulchand Sons (Investments) Pvt. Ltd with effect from December 14, 2004.

c)      Paresh Shah, the noitcee as Director of Phulchand Sons Pvt. Ltd., relied upon the reply dated November 10, 2005 of Phulchand Sons (Investments) Pvt. Ltd, as his reply to the SCN. Besides, Paresh Shah also submitted that he is no longer a director of Phulchand Sons (Investments) Pvt. Ltd with effect from April 30, 2005.

d)     Add Investment stated that the change in the price of the scrip and volume of a scrip are normal phenomenal and it cannot be ascribed to manipulation and hence it cannot be held guilty in the absence of any credible evidence including intention to manipulate. The firm totally denied any link with the broker Pravin V Shah. It stated that there was no meeting of minds or common objective with the other noticees to manipulate the scrip. The firm also contended that in choosing selective dates to highlight large volumes by the entities, distorts the overall picture. Referring to its trade during the cited period, the firm claimed that it was miniscule to have had any impact on the scrip. The firm denied any reversal of trades or synchronization, as was alleged, as the trades were done on the trading system of the exchange, where the identity of the counter parts remains unknown. All its transactions were genuine and it was not aware of any conspiracy to manipulate the scrip of AIL.

e)      Deepak Dalal and Anita Dalal relied upon the reply dated November 10, 2005 of Add Investments, as their replies to the SCN.

f)       Maruti Securities Ltd. in its reply made contentions which are identical to that of Add Investments, except for the change in the data pertaining to volumes traded and the percentage thereof.

g)     K Varadarajan, Smt. K Chitra, Smt. V N Anuradha, A Rakesh and Y Krishna, Directors of Maruti Securities Ltd., relied upon the reply dated November 08, 2005 of Maruti Securities Ltd., as their replies to the SCN.

5)     I was of the view that an inquiry should be held in the matter and notice of inquiries were issued to the noticees as under:

Table -4

6)      Mr. Anil Shah, Advocate appeared before me for the inquiry on April 25, 2006 and filed authorization on behalf of all the aforesaid noticees. The request of Mr. Shah for a joint inquiry in respect of the twelve noticees was allowed after obtaining the letters authorizing Mr. Shah to represent the twelve noticees in the inquiry. Mr. Shah reiterated the contents of respective replies of the noticees and in addition submitted that the Directors or the Partners of the aforesaid companies/partnership firm have not traded in their individual capacity and as such they may not be dealt or proceeded with the matter and the allegations mentioned in the show cause notice against them may be dropped.

7)      Findings: I have perused the material available before me and I now proceed to record my findings. From the records and the show cause notice, I observe as under:

a)      Deepak Dalal was director of Phulchand Sons Pvt. Ltd., at the relevant period (i.e. during September- October 2003). The fact that he is not the director w.e.f. December 14, 2004 does not absolve him, as he was the director of Phulchand Sons (Investments) Pvt. Ltd. during the period when the alleged trades took place.

b)     Deepak Dalal and Anita Dalal are husband and wife and are partners in Add Investments.

c)      The address of Anita Dalal is the same as that of Maruti Securities Ltd. It may be highlighted that in their respective replies both Anita Dalal and Maruti Securities Ltd., have not disputed this at all.

d)     Phulchand Sons Pvt. Ltd. (who traded through broker PVS), Add Investments (who traded through CJD) and CJD have the same address.

e)      Deepak Dalal was an authorized signatory of CJD. It may be highlighted that in his reply dated November 10, 2005, he has not disputed this fact.

8)      Given the aforesaid incestuous interrelationship amongst and between the noticees, their trades during the period of investigation are examined, details of which are given in table below:

Table – 5

a)      I find that Anita Dalal, the wife of Deepak Dalal and partner of Add Investments traded a gross volume of 199,794 shares of AIL; notwithstanding the high volumes, her net position at the end to the period was -5,000 shares. She traded through broker CJD, with client code ZA001. Therefore, the objection raised by the advocate in the inquiry on April 25, 2006, that the partners of the firm did not trade in their individual capacities, is not tenable.

b)     I find that Deepak Dalal, the husband of Anita Dalal and a partner of Add Investments and also a Director of Phulchand Sons, traded a gross volume of 181,860 shares of AIL; notwithstanding the high volumes, his net position at the end to the period was nil shares. He traded through broker CJD, with client code ZD001 and was also an authorized signatory of CJD. Therefore, the objection raised by the advocate in the inquiry on April 25, 2006, that the partners of the firm did not trade in their individual capacities, is not tenable. However, it is found that the directors of the other noticees viz. Maruti Securities and Phulchand Sons Pvt. Ltd.(except Deepak Dalal) have not traded in their individual capacity.

c)      I find that Add Investment, whose partners are Deepak Dalal and Anita Dalal, traded a gross volume of 1,465,436 shares of AIL; notwithstanding the high volumes, its net position at the end to the period was just 5,000 shares. It traded through broker CJD, with client code ZA247 and had the same address as that of CJD.

d)     I find that Maruti Securities, which has the same address as that of Anita Dalal, traded a gross volume of 314,483 shares of AIL; its net position at the end to the period was 48,117. It traded through broker CJD, with client code ZM254.

e)      I find that Phulchand Sons, whose director was Deepak Dalal, traded a gross volume of 740,995 shares of AIL; notwithstanding the high volumes, its net position at the end to the period was just -6,511 shares. It traded through broker PVS, with client code P043 and had the same address as that of CJD. Given the aforesaid, the contention of Phulchand Sons Pvt. Ltd. that it had no connection with the broker Pravin V Shah, is ridiculous. It is obvious that the lawyer’s reply pertaining to Add Investments has been furnished by Phulchand Sons Pvt. Ltd., without making any changes. This is confirmed in page 3 of its reply wherein trading volumes and its percentage thereof, pertaining to Add Investments have been reproduced ad verbatim!

f)       From the aforesaid trading pattern it is clear that, other than Maruti Securities, the other entities have done deals majority of which have been squared off. However, squaring off per se does not constitute artificial trade; all jobbers do that. It is the intention and nexus of the parties which establishes whether the trades are artificial or not. In the present case, we have a person, who has traded through multiple identities through multiple entities, which makes the intentions self evident. Deepak Dalal is the key person behind all the aforesaid trades and has traded through other entities viz. his partnership firm, Add Investments, Phulchand Sons, in which he was a director at that time and also through his wife Anita Dalal. The trades of Deepak Dalal, Anita Dalal, Add Investments and Phulchand Sons surely do not appear to be real.

g)     Maruti Securities is on a slightly different footing as it has a net position of 48,177 shares, which gives a picture that it was not part of the nexus for these artificial trades. But after examining further, it is found that Anita Dalal and Maruti Securities share the same address. It is sufficient to prove a nexus between the parities especially when they are trading between themselves. Another fact which strengthens my view is that all the aforesaid noticees appointed one Advocate and requested for joint inquiry, despite the fact that inquiry was fixed on different dates and timings.

h)     To ascertain the facts in this regard, I now examine the trades of all these entities in the third period, as the SCN contains specific allegation pertaining to this period. The details in this regard are given in table below:

Table – 6

i)       I find that Maruti Securities and Add Investment together sold 61,785 (58,000 and 3,785 shares respectively) shares of AIL on September 26, 2003. Phulchand Sons bought 61,642 shares. These trades constituted 70.8% of the gross traded volume of that day and amongst these entities, the net traded quantity was just 143 shares. On September 30, 2003, Phulchand Sons reversed its transaction by selling 61,642 shares which were bought by Maruti Securities, to an extent of 41,830 shares, thereby (partly) reversing Maruti’s trade on the previous day. These trades and that including Anita Dalal’s trades, constituted 71.8% of the gross traded volume of that day.

j)        After that Phulchand Sons bought and reversed the transaction the next day to an extent of 10,000 and 79, 500 shares on October 1^st and 6^th, 2003, respectively. Similarly, Add Investments is seen nearly squaring off transaction on October 1^st and 3^rd, 2003. Maruti’s trading pattern does not fully fit in with the allegation that these entities collectively indulged in reversal of trades, thereby generating artificial volumes. Notwithstanding the aforesaid, there are two factors that go against the noticees. First, the collective volumes of all these entities was high in period three – it was 33.8%, 47.7% 75.5% 92.2% and 56.1 % on October 1^st, 3^rd, 6^th, 7^th and 8^th, 2003 respectively. Secondly, the aggregate net position of all these entities together was just 4,425 although their gross volumes traded were 383,108 shares. Following table will describe the % of total volume traded by the noticees (period 26/9/03-8/10/03) :-

Table – 7

9)      I now proceed to examine whether the aforesaid artificial trades were done through synchronization. The Hon’ble SAT in its order dated October 31, 2003 in the Appeal no. 54-57 of 2001 in the matter of Nirmal Bang Securities Pvt. Ltd Vs SEBI, enumerated the basis for establishing the charge of matched / synchronized trades viz., complete matching of order time, order quantity and order rate over a period of time. The data in this regard, presented in Annexure – 5 to the SCN and also in paragraph 17 of SCN is examined, to ascertain whether the trades were synchronized or not. I find that the data in the annexure is in concurrence with the allegation in the SCN, which is sufficient to establish the charge that the trades in the period three were synchronized. The specific instances are pointed out below:

a)      Specific to Maruti, who traded through CJD, its (sell) order price, quantity and time broadly matched (buy) with that of Phulchand Sons, trading through PVS on September, 26, 2003. The traded quantity through synchronization was 53,202 shares out of total 87,222 shares.

b)     Maruti’s buy order price, quantity, and time broadly matched (sell) with that of Phulchand Sons, trading through PVS on September, 30, 2003. The traded quantity through synchronization was 35,719 shares out of total 73,520 shares. This finding is exclusive of the synchronized trades of Phulchand Sons with entities not included in the SCN.

c)      Add Investment’s buy order price, quantity and time, through CJD broadly synchronized with (sell) that of Phulchand Sons, trading through PVS on October 03, 2003. The traded quantity through synchronization was 10,000 shares, out of total 37,284 shares.

d)     Maruti and Add Investment’s sell order price, quantity and time, totally match (buy) with that of Phulchand Sons, trading through PVS on October 06, 2003. The traded quantity through synchronization was 69,255 shares out of total 99,327 shares. This finding is exclusive of the synchronized trades of Phulchand Sons with entities not part of this proceedings.

e)      Maruti’s buy order price, quantity and time, totally matched (sell) with that of Phulchand Sons, trading through PVS on October 07, 2003. The traded quantity through synchronization was 79,500 shares out of total 86,195 shares.

f)       Maruti’s sell order price, quantity and time, totally matched with (buy) that of Phulchand Sons, trading through PVS on October 08, 2003. The traded quantity through synchronization was 20,000 shares out of total 48,268 shares.

10)  From the aforesaid findings on the synchronized trades, the intention of Maruti Securities is self evident and the charge that it indulged in generating artificial trades, through synchronized trades, with Add Investments and Phulchand Sons gets established. The role of Deepak Dalal and Anita Dalal was discussed earlier with the conclusion that the trades ‘appear’ not be real. With the benefit of further examination of data, it is now confirmed that all the aforesaid entities also generated artificial trades, which have been through synchronized trades in the period three of the investigation. The aforesaid activities are fraudulent and thus prohibited under Regulation 4 (1) and 4 (2)(a), of PFUTP Regulations, 2003, which inter-alia provides as under:

SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003

4. Prohibition of manipulative, fraudulent and unfair trade practices

(1)    Without prejudice to the provisions of regulation 3, no person shall indulge in a fraudulent or an unfair trade practice in securities.

(2)    Dealing in securities shall be deemed to be fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following, namely:-

(a)          indulging in an act which creates false or misleading appearance of trading in the securities market;

(b) – (n) …………

11)  In order to establish the fraudulent nature of trades by the noticees reference is made to the definition of fraud as prescribed under Regulation 2 (c) of PFUTP Regulations, 2003 as follows:

"2 (c) "fraud" includes any act, expression, omission or concealment committed whether in a deceitful manner or not by a person or by any other person with his connivance or by his agent to deal in securities, whether or not there is any wrongful gain or avoidance of any loss, ………"

From the aforesaid definition it is established that the conduct of the noticees has been fraudulent as by way of generating artificial volumes, they have created a false impression amongst the general investors that the scrip is very active and frequently traded and which has induced the general public to deal in securities. The aforesaid violation attracts penalty in terms of Section 15HA of SEBI Act, 1992 which inter-alia reads as under:

Provisions of 15HA of SEBI Act, 1992

"15HA. If any person indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to a penalty of twenty-five crore rupees or three times the amount of profits made out of such practices, whichever is higher."

12)  To determine the quantum of penalty under Section 15HA, the undersigned considered the following factors as provided in the section 15J of SEBI Act, 1992 viz. (a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; (b) the amount of loss caused to an investor or group of investors as a result of the default and; (c) the repetitive nature of the default. It is now established that Deepak Dalal, his wife Anita Dalal, Add Investments, Phulchand Sons and Maruti Securities have together generated artificial volumes in BSE. From the material on record it is not possible to arrive at a figure of loss caused to the investors and the gains made by the noticees. Considering the continuous efforts of notice to create artificial volumes through synchronization, it can be said that the nature of default is repetitive as the synchronized trades were done from September 26, 2003 to October 08, 2003. The aforesaid artificial trades through synchronization only relates to period three of the investigations, whereas there are other artificial trades done in period one and two, by these entities.

13)  The aforesaid default should be viewed seriously as it affects the normal price discovery mechanism of the securities market and in the process, investors suffer a lot. The artificial volumes such as noticed in the present case, though not coupled with significant price movements/fluctuations, give an impression of trading which in fact is not real and the general investors at large get induced to deal in securities. In order to protect the interest of investors in the securities market, this type of activity should be curved and dealt firmly.

14)  Therefore, in exercise of the powers conferred under section 15-I (2) of the SEBI Act, 1992, read with Rule 5 of SEBI Adjudication Rules, I hereby impose a consolidated penalty of Rs. 10,00,000 (Rupees Ten lakhs) collectively on the following entities:-

a)      Phulchand Sons Investments Pvt. Ltd.,

b)     Add investments and its partners Deepal Dalal and Anita Dalal, and

c)      Maruti Securities Ltd.

under section 15HA of SEBI Act, 1992. All the entities mentioned above shall be liable to pay the aforesaid penalty jointly and in case of failure to pay jointly, the entities shall be liable severally.

15)  The aforesaid entities shall pay the said amount of penalty by way of demand draft in favour of “SEBI- Penalties Remittable to Government of India”, payable at Mumbai within 45 days of receipt of this order. The said demand draft should be forwarded to, Shri P K Nagpal, Chief General Manager, Investigation, ID-1, Mittal Court, 1st floor, B- Wing, 224, Nariman Point, Mumbai 400 021.

16)  This order of adjudication is made and passed on 17^th day of May 2006 at Mumbai.

AMIT PRADHAN

ADJUDICATING OFFICER